Research and analysis

Mexico: road ahead for the economy

Published 22 August 2014

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Mexico

Detail

Following Congress’ approval of the implementing legislation for energy reform, President Peña Nieto signed the legislation into law on 11 August and addressed the nation that evening. The President set out measures his administration would take to accelerate implementation) and he and others stressed the long-term significance of this reform.

Energy reform was the most symbolic but also the most challenging of the ambitious structural reforms promised by the Peña Nieto administration when it took power 18 months ago. Its conclusion marks the end of a remarkable period of legislative advances in Mexico. While the scale of what has been achieved is widely acknowledged, there is also an awareness of a long road ahead to achieve the promised outcomes in economic performance and social development.

The Government itself accepts that any tangible benefit from the reforms will only be felt in the medium to long term. Treasury Minister Videgaray – one of the main architects of the reforms – predicted that energy reform would increase Mexico’s GDP by 1% by 2018 and 2% by 2025.

Meanwhile in July, Banxico and the IMF again downgraded their 2014 annual growth forecasts to 2.5% and 2.4%, respectively. These figures indicate that output is returning to its long-term trend (2.4%) after the rebound seen in 2010-2012, when the economy grew on average 4.4%. Almost every forecast available for 2014 predicts a growth rate below the Ministry of Finance’s figure (2.7%).

There is strong international confidence in Mexico, with e.g. foreign investment in the manufacturing sector allowing Mexico to increase the level of its automotive exports to the US market. In late July, Japanese PM Abe headed a large business delegation to Mexico building on their 65% increase in investment in the country, to a tune of £13bn. The signing into law of the energy reforms will also mark a new phase of intense activity by international energy companies, including UK majors and SMEs.

The next challenge for Peña Nieto’s team is Mexico’s pressing social development agenda. A new paper from the National Institute of Statistics (INEGI) reports that 59% of the occupied labour force remains in the informal economy. The fact that they only produce 25% of Mexican GDP highlights the large differences in productivity between formal and informal workers, one of the main causes behind the uninspiring performance of the economy. There are structural causes behind this informality. Scarcity of credit for SMEs in Mexico is one. The process of opening and registering a formal business in Mexico is also long and bureaucratic. The social security system is also of low quality and linked to the legal status of the worker, discouraging employers from formalising the status of their employees.

The universal healthcare reform proposed by Peña Nieto during his presidential campaign, while not yet included on Congress’ agenda, could significantly reduce levels of informality by encouraging companies to formalise the status of their employees, reducing their hiring costs and their sense that they are being ‘penalised’ over employees’ health care costs.

A national discussion has also begun on increasing the minimum wage. The latest report from the UN’s Economic Commission of Latin American Countries (ECLAC) revealed that the real minimum wage in Mexico is amongst the lowest in the region. The government of Mexico City, has responded by proposing an increase in the minimum wage up to the poverty line. But there has yet to be any federal consensus on this

Comment

Pushing through these wide-ranging reforms, most notably of the energy sector, is a remarkable political achievement, defying the many who thought it could never be done in Mexico. With this legislation in the bag, Peña Nieto’s State of the Union Address in early September will be a key moment to set out how his government will take forward social reform ahead of mid-term elections in 2015.

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